GOOG: Mixed Street Views Of ‘Expensive’ MMI Deal (Update)

By Tiernan Ray

Yes, folks, even more reports continue to pour in regarding Google’s (GOOG) announcement this morning it will buy Motorola Mobility (MMI) for $12.5 billion in cash.

Reactions are decidedly mixed today, though one fellow certainly happy: activist investor Carl Icahn, who holds 33.5 million shares. Icahn was urging Motorola to do something with its patent trove, and today he’s satisfied, according to one account by Bloomberg’s Miles Weiss. Icahn’s stake increased in value today by $600 million. (Weiss is referring to the difference in value between Motorola shares on July 20th, when Icahn met with Moto to discuss the company’s actions, versus the take-out price of $40.) “Motorola is activism at its best,” Icahn remarked today, according to Weiss, citing a Bloomberg TV interview.

Google stock continues to slide this morning, down $16.24, or almost 3%, at $547.53.

Gene Munster, Piper Jaffray: Reiterates an Overweight rating on Google shares. “While the acquisition may not necessarily accelerate the Android adoption curve, we believe it will afford Google and its handset partners protection as Android continues to grow.” Potential “channel conflict” with Google’s Android partners won’t be a big problem for Android, thinks Munster, while the deal may pay for itself in saved royalties over several years: “If you assume an average patent cost of $10 could be saved by Android partners (the mid-point between the $5 and $15 charges to HTC and Samsung) and essentially no growth in Android devices from 2012, the Motorola acquisition could reach payback on the patents indirectly (i.e. in value to partners) in 5 years. Assuming Android continues to grow and reaches 50% market share over the next 4 years from 40% in Q2, we believe payback could be less than 4 years

Doug Anmuth, JP Morgan: Reiterates an Overweight rating on Google shares, writing that the deal is expensive but necessary. Moto’s set-top business gives Google “a potential pathway in the living room. we believe Android handset manufacturers could review their dependence on the Android OS given Google’s new closer relationship with Motorola. Google previously attempted mobile hardware development with Nexus One, and we believe it is possible the company is attempting greater integration of Android within handsets and potentially set-top boxes.”

Sameet Sinha, B. Riley: Reiterates a Buy rating, while cutting his price target to $724 from $768, writing that increased cost of capital and a lower earnings multiple will create an “overhang” on Google shares. “While we are in favor of the end, the means to do so changes the financial and operational structure of Google as it puts them into businesses where it has no experience and threatens the ecosystem. The deal should face significant regulatory scrutiny to assess the benefit to Google’s Search and Display businesses.” Sinha steps through a discussion of the various risks: “GOOG does not know manufacturing. While MMI will be run as a separate unit, we would rather that GOOG sell off the manufacturing piece, as there cannot be synergies without impacting the ecosystem [...] By owning one of these [Android hardware] partners, it stands to alienate the others. While the company had testimonials for other partners supporting the deal, the realities of business and competition, can be very different.”

Ross Sandler, RBC Capital Markets: Reiterates an Outperform rating on Google stock and a $790 price target. The deal is expensive, taking up a quarter of Google’s cash. There’s perhaps $10 billion implied for the patents, based on the implied value of the existing business, he writes, though it’s impossible, in his opinion, to say just how much Google is overpaying. But with $2 billion to $3 billion in free cash flow per quarter, Google can afford to spend a year’s cash generation on the deal. “We have consistently stated that the likely outcome of all of these lawsuits is licensing agreements among the various Android OEMs and the patent holders (similar to the $5/unit that HTC (2498TW) currently pays to Microsoft (MSFT) for Android), and with this acquisition Google vaults itself to the top of the foodchain in terms of IP and removes some of those future expenses.”

Anthony DiClemente, Barclays Capital: Reiterates an Overweight rating on Google and a $730 price target. “We view this as a highly strategic and defensive acquisition for Google as it would include ownership of 17,000+ approved and 7,500 pending patents. Google expects the acquisition to be marginally accretive in its first year and given low interest rates, Google’s $39+ billion in cash as of 2Q, and the strategic importance of Android longer-term, we are hopeful on the acquisition, although integration risks are high.”

Jamie Townsend, Town Hall Investment Research: “While we believe the decision by Google to enter the mobile hardware business to be a mistake, we also believe that the company’s choice to be a poor one as well. If Google’s primary goal has been to facilitate advertising on mobile devices through the growth in Android, than taking on one of the device vendors would seem to run counter to that approach. In our view, the major appeal of Android has always been its independence from the device vendors. That will no longer be the case.” Townsend thinks the “focus” on Android by partners Samsung Electronics (SSNLF) and HTC is “now at risk,” though, unlike Canaccord Genuity’s Mike Walkley, whom I quoted earlier, he doesn’t see much lift for Microsoft’s Windows Phone 7 as an alternative, given that Microsoft is “already firmly in bed with Nokia (NOK), another competitor.” To the extent it hurts the momentum of Android, the deal may be a slight positive to Apple, he thinks.

Mark McKechnie, ThinkEquity: Microsoft’s Windows Phone now becomes “the only true open OS,” and there’s a slight benefit to Microsoft and Apple (AAPL) ecosystems. “On the margin, we see GOOG’s ownership of MMI as a negative to the overall Android ecosystem as the IP gained by Android is offset by GOOG’s indirect entry into hardware. This puts GOOG in competition with key Android partners including Samsung and HTC. Although GOOG went out of its way to stress that Android will remain open, we suspect some pushback from key partners.” McKechnie says there’s no change in his view of Research in Motion’s (RIMM) BlackBerry and QNX operating systems, as they remain “closed” platforms, in his view. There’s a slight positive impact for Qualcomm (QCOM) as “Qualcomm’s SnapDragon is the only approved apps processor for WP7, but in general, we view market share shifts amongst OS vendors as neutral to QCOM.”

Yun Kim, Gleacher & Co.: Reiterates a Neutral rating on Google shares. The deal is expensive but necessary, writes Kim. “In our view, Android has already achieved its initial goal of accelerating adoption of smartphones in the marketplace, which leads to greater volume of mobile search. This trend indirectly benefits GOOG. Currently, Android does not generate any meaningful revenue stream for the company. Given the level of new investment in protecting its Android franchise, we believe investors are likely to expect more direct monetization strategy of Android, which the company has yet to clearly articulate.”

Tavis McCourt, Morgan Keegan: McCourt cut his rating on Moto to Hold, and advises Google try and make a real go of integrating hardware and software: “We believe GOOG would be ill served not to take this opportunity to become vertically integrated (a la Apple/RIM). It is clear that selling 3rd party OS in the mobile computing world, is at best a marginal business, and the gross margin dollars from “devices” can be as much as 10x as for OS licenses, advertising or search.”

Charlie Wolf, Needham & Co.: Reiterates a Hold rating on Moto shares. The deal may not bring Google much: Apple has won “important court cases” against Samsung and HTC, and “the Motorola acquisition does not address these issues in any fundamental way. Motorola has ongoing lawsuits with Apple and Microsoft; and its acquisition by Google will not change any of this. So it’s unclear what the value of Motorola’s patent portfolio is as a defensive weapon.” As for integrating hardware and software, “Motorola itself has been losing share to Samsung, HTC and other licensees on the Android platform. And the company continues to be unprofitable on a GAAP basis. So it’s an open question whether Google, a novice in hardware, can turn Motorola around without anointing it favored status within the Android license community.”

Mike Abramsky, RBC Capital Markets: The deal will could be trouble in the near-term. “GOOG/MMI (given GOOG’s priority for advertising, mobile platform domination and community expansion) may pursue a disruptive share gain strategy vs. Apple, Microsoft. However in the near term, the challenges and distractions of integration (similar to NOK/MSFT) could help Apple gain share. This deal may weaken the hand of Android OEMs (Samsung, HTC, LG, etc) and may put additional pressure on RIM, MSFT to win ‘third platform’ status.”

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